Two small Texas oil refiners on Tuesday announced plans to merge in a deal that will create a larger, regionally focused fuel provider that sees an opening to boost profits in an industry some larger rivals are leaving.

Dallas' Holly Corp. will buy Houston-based Frontier Oil Corp. for nearly $3 billion in stock and assume Frontier debt, then create a company called HollyFrontier Corp., which will be based in Dallas.

The companies said the combination will give them a bigger share of niche fuel markets in the middle section of the U.S., the Southwest and Rockies, as well as expand their access to cheaper domestic and Canadian crude supplies. That will make the new entity the most profitable independent refiner in the U.S. on a per-barrel basis, they said.

The merger also gives Holly a bigger balance sheet to consider potential acquisitions that neither could have pursued alone, said Mike Jennings, the chairman and CEO of Frontier, who will become CEO of the combined company. Matt Clifton, Holly's chairman and CEO, will become executive chairman.

"We think that those opportunities are going to become clear as we go forward," Jennings said in an interview Tuesday. "In particular, I think there's a pretty strong dynamic in place of majors shedding downstream assets in North America."

Major companies including BP and Murphy Oil have announced plans to sell U.S. refineries after oil price swings in recent years brought unwanted volatility. Last month, Houston's Marathon Oil Corp. said it would spin off its U.S. refining business and narrow its focus as an upstream oil and gas producer.

Regional markets

But Holly and Frontier operate small refineries that are closely tied to regional markets and don't compete as aggressively on costs as bigger plants, like those on the Gulf Coast, said Jeff Dietert, an industry analyst who follows the companieswith Houston investment bank Simmons & Company International.

Together, they will have roughly 440,000 barrels per day of crude-processing capacity at five refineries. Holly operates refineries in Artesia, N.M., Tulsa, Okla., and Woods Cross, Utah, while Frontier has plants in El Dorado, Kan., and Cheyenne, Wyo.

They said they hope to take advantage of a recent discount in domestic and Canadian crudes, arising in part from an uptick in production from North Dakota's Bakken Shale play and new pipeline shipments of Canadian oil into the U.S.

The proximity of the company's plants to those U.S. fields and to an oversupplied oil hub in Cushing, Okla., could give it an edge on many coastal refiners forced to buy crude that more closely tracks global prices, Dietert said. On Tuesday, for instance, West Texas Intermediate, a common U.S. crude used by Midwest refiners, traded at $17 a barrel less than Louisiana light, sweet crude widely used on the Gulf Coast, he said.

In addition, the companies said the merger should result in at least $30 million in annual cost savings from operational efficiencies.

A previous attempt

In 2003, Holly and Frontier had agreed to a $464 million merger agreement, but the deal fell apart over environmental litigation then pending against Frontier.

Under the new deal, expected to close in the third quarter, Frontier shareholders will receive 0.4811 Holly shares for each share of Frontier stock. Holly shareholders will then own 51 percent of the company, with Frontier shareholders owning the rest.

Once the deal closes, Frontier will shut its Houston office, which employs eight people, Jennings said. He added that some Houston employees will be relocated.